Executive Guide to Private and Public Blockchains

If you are looking into distributed ledger technology and blockchain application for the enterprise, it is important to understand the difference between public and private blockchains. Let’s examine some of the properties, strengths, and weaknesses of both types, as well as look at some notable examples of their business implementation.

Public Blockchains

This is the model of Bitcoin, Ethereum and other cryptocurrencies on the market. This is the original design and the essential technology that allowed so many other versions of distributed ledgers to branch out. It is still considered by many to be the prototype for all blockchains, although it is not without drawbacks.

In simple terms, public blockchains can receive and send transactions from anybody in the world. Same applies to verification, as it can be audited by anybody – every node has equal transmission power. Before a transaction is considered valid, it must be authorized by each of the existing nodes that belong to the network via a consensus mechanism. As long as each node abides by the protocol, their transactions can be validated.

Many blockchain enthusiasts believe in the value of networks that are not only decentralized but also distributed. Both are a major benefit of public blockchains, making them transparent and secure. Security-via-openness is a principle well known in the open source world, and this strategy is also popular in the digital currency community.

However, transparency does not mean that public blockchains are completely impervious to hacking and malicious intent. Any time data enters a digital network, it can become subject to security breaches and unethical use. There are always going to be bad actors interested in exploiting weaknesses in the system.

Public blockchains are quite expensive too, and not just in terms of finance. The time and resources required to process transactions on public chains take more due to the equal power of each node and the consensus process.

All cryptocurrencies operate on public blockchains. Bitcoin was the first example of a public blockchain when it was created in 2008 and proved that money could be moved across the globe without third-parties like banks or money transmitters.

Primary features offered by public blockchains:

No central bank controlling transactions;

No cyber-attacker has ever hacked Bitcoin or Ethereum – the two largest networks;

Immutable ledgers with more secure transactions.

Private Blockchain

In private blockchains, only pre-determined nodes have the ability to create new transactions on the chain. Thus, a private blockchain is a closed network that offers constituents the benefits of the technology, but is not necessarily decentralized or distributed, even among its members. This provides developers of the chain a lot of flexibility in picking the parties with reading and writing rights within the network.

As a result, the decentralization and distribution features are severely impeded within this setup. However, other features like strong cryptography and audit offer private blockchains more security than traditional protocols. Furthermore, voting platforms, accounting systems, and any type of data archive can arguably be optimized with blockchain technology.

When a company decides to implement blockchain as a business solution, they usually opt for a closed network for internal members. This makes them a lot more efficient than public blockchains. It is easier for a consensus mechanism to perform, and the internal rules and stipulations can be altered as the business requires or sees fit, i.e. if the proprietors want to change the cryptographic method which runs its consensus process. Companies that use private blockchains can ultimately save time and money, assuming there is no need for a public component to their blockchain.

The following are notable examples of private blockchains:

Quorum: JPMorgan Chase, one of the top 10 banks in the US, has developed this private blockchain, which is designed for the financial service industry. The project team has forked the Ethereum blockchain to create this new solution. For this reason, Quorum supports several Ethereum features such as smart contracts.

Quorum moves some parts of transaction data off-chain. However, it still stores the cryptographic hash of the transaction data on-chain. This enables transaction validation because the hash is immutable, and one data set will always produce the same hash. Hence, if the hash matches, the transaction is valid. No unauthorized stakeholder can see the transaction data.

Quorum uses a constellation protocol and is a permissioned blockchain. This allows one node to send encrypted messages to another. One example of use cases for this blockchain is in handling investment transactions in a secured manner, which is exactly what it was designed for.

R3 Corda. Another platform specifically designed for the financial service industry. It’s a permissioned blockchain, with different access levels for different category of nodes that operate according to different organizational roles and responsibilities.

Corda uses smart contracts, and a notable feature is that smart contracts in this platform have specific legal expressions. This industry operates under stringent regulatory frameworks, therefore, the legal expressions in the smart contracts are designed to give sufficient coverage and legitimacy.

Which blockchain is better for business?

Public blockchains still have a lot of hard technology problems that need to be addressed before they become viable enterprise solutions. First and foremost is privacy. Transactions that take place on a public blockchain are exactly what the description says – public. This means that anyone can see them take place.

Another major obstacle for enterprise adoption is speed. For instance, every node on the Bitcoin blockchain is required to validate each transaction. The result is low transaction throughput. Visa, for example, couldn’t use such a public blockchain as they must instantaneously confirm transactions.

One more limitation that hobbles public blockchains is resource allocation. Every node stores information on the public blockchain indefinitely. This imposes heavy storage constraints. Realistic business applications can’t afford such high data storage redundancy.

Private blockchains solve this by adding privacy controls at the detriment of security. In practice, private blockchains act as a middle ground between traditional cloud computing and decentralized public blockchains. Compared to public blockchains, they have a number of advantages. The company running a private blockchain can easily change the rules of a blockchain, revert transactions, modify balances, etc.

Transactions are cheaper, since they only need to be verified by a few nodes that can be trusted to have high processing power, and do not need to be verified by thousands of laptops. This is a hugely important concern right now, as public blockchains tend to have transaction fees exceeding $0.01 per tx.

Nodes can be trusted to be very well-connected, and faults can quickly be fixed by manual intervention, allowing the use of consensus algorithms after much shorter block times. Private blockchains will always be faster and the latency difference will never disappear, even though public blockchain speed problems can be somewhat rectified.

Given all of this, it may seem like private blockchains are unquestionably better for institutions. However, even in a business context, public blockchains still have a lot of value, among the chief of which are freedom, neutrality, and openness – the very basic concepts that support the notion of a distributed ledger.

If all of this is still slightly confusing and you and your business need more background on the private vs public blockchain adoption – feel free to reach out and our team will gladly help you sort things out.

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